Given the economic data that is coming out of most economies and also the fact that the indian economy looks like slowing down further before it rebound in the second half of the year the near term outlook for stock markets does not look very sanguine.
I expect the markets to see a correction of around 10-15 percent from the current levels and this should happen before 15th of April 2009. However the bottom that will be made this time will be the final leg of the correction for the markets and subsequently we should see the markets recover sharply and by the end of the year we should see the markets moving up by atleast 50% from the bottom.
The overall macro factors for the indian economy are turning extremely positive with the sharp correction in crude and other commodity prices. Inflation has come down substantially and likely to be zero to sub zero over the next six months. Interest rates which should have come down sharply by now have not mainly due to the rising fiscal deficit and thus extra borrowing requirements of the central and state governments is likely to prevent the interest rates from falling at a sharp pace, which was initially expected. However a larger fiscal deficit used to improve economic growth will utlimately be positive for the stock markets.
There are three factors that are likely to help the economy grow at a healthy pace over the next one year where the rest of the global economies will slow down substantially . These are strong government spending, strong rural incomes and higher consumption due to the sharp increase in public sector employee salaries. Although the private sector after years of expansion is seeing a slowdown and lower income growth it is likely to be countered by these three factors.
The profit growth expectations for the next financial year have come down substantially and have become excessively pessimistic. With falling input costs, lower interest costs and lower pressure on employee costs actual profits are likely to be much better than expectations. A positive divergence of earnings tends to be positive for stock markets as a negative divergence is negative ( which we have seen this year).
Investors should use the next two months to build up long term investments into equities.
Will write more later…..
